Singapore Hospitality

Uobkayhian on 11 Sept 2013

CDL Hospitality Trusts (CDREIT SP/BUY/Target: S$1.93).
Ascott Residence Trust (ART SP/HOLD/Target: S$1.43).

Visitor arrivals remained healthy; strong Singapore dollar could pose near-term headwinds. The Singapore Tourism Board (STB) data shows July visitor arrivals grew 8% yoy to 1.39m, bringing 7M13 arrivals to 9m,
+7.6% yoy. However, there could be some near-term headwinds to tourism revenue growth and to a lesser extent, on visitor arrivals, from the recent appreciation of the S$ vs four of the five top-5 visitor arrival markets - Indonesia, Malaysia, Australia and India - which account for 40% of total arrivals. Anecdotal evidence suggests visitors tend to tighten their shopping and entertainment budgets (40% of overall) compared with that for accommodation and sight-seeing. Despite near-term headwinds, we expect visitor arrivals to meet our 6% growth expectation in 2013-14.

Room rates dragged down by new supply. In 7M13, overall hotel occupancy remained steady at 86% (-0.4ppt) while average room rates (ARR) fell 2.5% yoy to S$252. By segment, the upscale and economy witnessed the highest ARR decline of 13.5% yoy and 7% yoy segments respectively while the luxury segment rose 5% yoy. Our channel checks indicate that the fall in room rates is due to two main reasons: a) promotional rates offered by new entrants to gain market share, and b) tighter corporate budgets and delayed bookings resulted in hoteliers replacing some of the higher-yielding corporate bookings with slightly lower-yielding leisure travelers.

While the strong Singapore dollar and concerns of new supply could weigh on share prices in the near term, we see value emerging in hospitality REITs amid the recent S-REIT sell-down on concerns of the US tapering and a rise in interest rates. CDL Hospitality Trust is our top pick in the hospitality sector.